Pharmacy Reimbursement Models: How Laws Shape Generic Drug Payments

• By Nina Maissouradze
• 19 Nov, 2025
• 2 Comments

When you pick up a generic prescription at the pharmacy, you might think the price is simple: a few dollars, maybe even free if you’re on Extra Help. But behind that low cost is a tangled web of federal laws, state regulations, and corporate contracts that decide exactly how much the pharmacy gets paid - and whether they can even afford to fill your prescription. The system wasn’t designed to be fair to pharmacies or transparent to patients. It was built to cut costs for insurers and government programs, often at the expense of the local pharmacy on the corner.

How Generic Drugs Are Paid For: The Two Main Models

There are two primary ways pharmacies get reimbursed for generic drugs: Average Wholesale Price (AWP) and Maximum Allowable Cost (MAC). AWP used to be the standard. It’s based on a list price published by drug manufacturers - a number that often has little to do with what the pharmacy actually paid for the pills. Back in the 2000s, AWP was inflated by as much as 200%, making it a terrible measure of real cost. Today, most payers have moved away from AWP for generics because it’s outdated and misleading.

MAC is now the dominant system. It sets a fixed payment cap for each generic drug based on what pharmacies are actually paying in the wholesale market. For example, if the MAC for 30 tablets of generic lisinopril is $4.20, the pharmacy gets paid that amount - no more, no less. If the pharmacy bought the same pills for $5.10, they eat the 90-cent loss. That’s not theoretical. In 2023, the average reimbursement margin for generic drugs was just 1.4%. For some small, independent pharmacies, that’s barely enough to cover rent, staff, and utilities.

State Laws and the Battle Over Generic Substitution

Every state has its own laws about whether pharmacists can substitute a brand-name drug with a generic. Most states allow substitution unless the doctor writes "dispense as written" or the patient refuses. But that’s only half the story. What happens after substitution is where the real financial pressure kicks in.

Some states, like California and New York, require payers to reimburse at the same rate whether the brand or generic is dispensed. That protects pharmacies from losing money when a patient gets a generic. Other states don’t. In those places, if a pharmacist dispenses a brand-name drug - even if the patient asked for it - they still get paid only the MAC for the generic. That’s a huge risk. Imagine filling a prescription for a brand-name drug that costs $15 to buy, but the system only pays you $4. You’re out $11. No pharmacy can survive that long-term.

These laws are why some pharmacists refuse to fill certain brand-name prescriptions. They know they’ll lose money. And they’re not being difficult - they’re trying to stay in business.

Medicare Part D and the Hidden Costs of Formularies

Medicare Part D covers nearly 51 million people. It’s supposed to make drugs affordable. But the way it handles generics is anything but simple. Each Part D plan has its own formulary - a list of approved drugs - and divides them into tiers. Generics usually sit on Tier 1, with the lowest copay. But here’s the catch: 28% of Part D plans in 2022 required prior authorization for at least one generic drug. That means even if your doctor prescribes a generic, your plan might block it unless they jump through hoops.

Some plans also use step therapy. You have to try a cheaper generic first - even if your doctor says it won’t work for you. If it fails, you can appeal. But the process takes days, sometimes weeks. Patients skip doses. Their conditions worsen. And the pharmacy? They’re stuck waiting for approval while the patient waits in the aisle.

The real kicker? Part D plans often don’t tell you the true cost. A drug might be on formulary, but if it’s not preferred, your copay could be double what you expected. And if you’re in the coverage gap - the old "donut hole" - you might pay 25% of the full price, even for a generic. That’s still hundreds of dollars a year for someone on a fixed income.

Pharmacy Benefit Managers: The Middlemen Who Control Everything

You’ve never heard of them, but CVS Caremark, Express Scripts, and OptumRX control over 80% of all prescription claims in the U.S. These are pharmacy benefit managers (PBMs). They’re not pharmacies. They’re not insurers. They’re negotiators who work for insurers and Medicare plans to drive down drug costs.

How? By negotiating rebates from drug manufacturers. But here’s the problem: PBMs make money in two ways. First, they take a cut of those rebates. Second, they use something called "spread pricing." That’s when they tell the insurer they’re paying $10 for a generic drug, but they only pay the pharmacy $6. The $4 difference? That’s their profit. And it’s hidden from everyone - the patient, the doctor, even the insurer.

This system rewards PBMs for keeping reimbursement low. The lower they pay pharmacies, the bigger their spread. And since they control which pharmacies are in-network, independent pharmacies have no leverage. If you don’t accept their terms, you’re out of the system. That’s why 44 states have passed laws to regulate PBM practices - but enforcement is weak.

The $2 Drug List: A New Hope for Generic Access

In 2025, CMS is testing a new program called the Medicare $2 Drug List Model. It’s simple: select about 100 to 150 clinically important generic drugs - things like metformin, atorvastatin, levothyroxine - and cap the patient’s copay at $2. No deductible. No formulary restrictions. Just $2, no matter which Part D plan you’re on.

This isn’t charity. It’s smart economics. These drugs are cheap to make, widely used, and proven to prevent hospitalizations. If patients can afford them, they take them. If they take them, they get healthier. And if they get healthier, Medicare spends less on ER visits and hospital stays.

The model is voluntary, but early feedback from large retailers like Walmart and Kroger shows it works. Their pharmacies already offer these drugs at $2 or less. The question is whether Part D plans will adopt it. And whether PBMs will let them.

Why Pharmacists Are Struggling - And What It Means for You

Pharmacists aren’t just dispensers. They’re the last line of defense against medication errors, drug interactions, and affordability crises. But the current reimbursement system is pushing them out of business. Independent pharmacies closed at a rate of 1.5% per year from 2018 to 2023. Many of those were in rural areas or low-income neighborhoods.

If your local pharmacy closes, you might have to drive 20 miles to get your meds. Or switch to mail-order - which often delays refills and doesn’t offer face-to-face counseling. That’s not convenience. That’s a public health risk.

The $2 Drug List could change that. If it succeeds, it could become a national standard. It could force PBMs to stop hiding their spreads. It could give pharmacies a stable, predictable income for the most common generics.

But it won’t fix everything. Until laws require transparency in PBM pricing, until states stop letting insurers pay less than the cost of the drug, and until Medicare stops letting formularies block access - the system will keep favoring corporations over patients and pharmacies.

What You Can Do

You don’t have to accept this system as normal. Here’s what works:

• Always ask your pharmacist: "Can I pay cash instead?" Sometimes, the cash price is lower than your copay - especially for generics.
• Check if your pharmacy offers a $2 or $4 generic list. Walmart, Target, and Costco do. You don’t need insurance.
• If your plan denies a generic, file an appeal. You have the right.
• Ask your doctor to write "dispense as written" only if necessary. Otherwise, let the pharmacist choose the generic.
• Support state laws that cap PBM spreads and require reimbursement transparency.

The truth is, the law doesn’t set prices - it sets incentives. Right now, the system incentivizes PBMs to pay less, insurers to block access, and pharmacies to close. But change is possible. The $2 Drug List proves it. If enough people demand fairness, the system can shift. Your prescription shouldn’t be a financial gamble. It should be a promise kept.